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Cott Never Sleeps

With sales and earnings growing, this key Wal-Mart supplier of generic soda pop is one to watch.

The generic soft drink business might seem sleepy, but that doesn't mean management can sleep on the job -- not with massive competitors Coca-Cola(NYSE:KO), PepsiCo(NYSE:PEP), and others in the battle. Keeping that in mind has helped Canadian popster Cott(NYSE:COT) deliver market-crushing gains since the stock hit 10-year lows in early 1999.

The heavy lifting was done from 1998 and 2001, when management refocused on operations, cost structure, and the businesses it considered most important: moving fizzy drinks in the U.S., U.K., and Canada. This meant exiting a variety of businesses from pet foods to frozen foods to packaging design. The result looks solid -- and we got a reminder of that on Friday.

That's when Cott announced that it expects full-year sales growth of between 13% and 16%, its fourth straight year of top-line increases. Forecast EPS of $1.03 to $1.07 is likewise better than the company expected when the year began. For 2004, Cott is steering investors toward sales growth of 10% to 12% and earnings growth of 15%.

This is encouraging for a number of reasons. Surprisingly, Cott's operating margins were better than Coke's in 2003. As a generic, Cott can't charge as much, which hurts gross margins, but it also doesn't need to spend as much on marketing and brand management. Still, while Cott is much leaner than it was in 1998, it absolutely must grow to compete with larger, branded rivals.

The results further suggest that Cott's efforts to find new markets -- it still sees significant growth opportunities in existing markets, especially in the U.S. and Mexico -- are working. It has a hugely valuable partner in Wal-Mart(NYSE:WMT), which accounted for 40% of 2002 sales, but would like to broaden its customer base and reduce its reliance on key clients.

Acquisitions and alliances have also boosted growth in recent years. Management expects that to continue going forward, which, combined with the latest results, makes Cott one to watch.